Bethlehem, Pennsylvania, June 10, 2022 (GLOBE NEWSWIRE) — Like many small and medium-sized software development companies, Software Consulting Services LLC (SCS) had a sales and implementation model that revolved around a large initial capital purchase of software followed by ongoing technical support.
After the economic collapse of 2010, this buying pattern began to produce less returns. In 2014, SCS faced declining revenue, less development, and prospects who could no longer afford large, early purchases. The buying pattern was broken and threatened to slowly destroy the business.
Luckily, current owner and managing member Kurt Jackson had a solution.
In 2015, Jackson worked directly with the former owner of SCS to reinvent its buying model. Over the next year, they realized that almost everything had to be reinvented for the subscription model to restart the engine of the business.
This is when they decide to go back to the start-up era. It was time to challenge and rework every aspect of their 30-year-old software development business. In 2015, they signed their first new client with a subscription contract.
Today, subscription revenue makes up 70% of their annual recurring revenue (ARR), with traditional support contracts and integration services making up the rest. At the start of 2020, the monthly ARR had exceeded their monthly operating costs and continues to climb. 2021 has been the best year for SCS in the past 17 years.
With initial subscription terms between 3 and 5 years and automatic annual renewal after the initial term, the 7-year value of a new customer has doubled. Their annual churn rate is around 6% and their 7-year compound monthly growth rate (CMGR) is 10.4%.
Their vision and innovation at SCS probably saved the company. Not only that, it blazed a new trail, re-energizing the team and generating bigger revenue than ever. Jackson and SCS have mapped out a roadmap for change, and now they want to help traditional software development companies realign themselves for the future and secure a reliable, dependable ARR revenue stream.
How to Beat the Odds and Move to Service-Based Recurring Revenue
Although SCS has been able to reinvent itself with SaaS licensing and sales models, their transformation has not been without challenges. Jackson identified six key points to consider when transitioning to a subscription model. By doing so, small and medium software companies can make the change more efficiently – and potentially avoid costly missteps along the way.
1. Anticipate and plan for cash flow problems
As Jackson explains, they initially underestimated the stress the transition process would have on cash flow. Companies should remember that they are exchanging upfront money for longer term subscriptions.
“Make sure you let your lenders know what the process is and what you can ask of them,” Jackson says. “We had to extend our line of credit from $250,000 to just over $800,000, and for at least 3 years we used it. We would repay most of it in the first quarter of each year, but without it we would have had problems. »
From the start, they kept a detailed plan of how many subscriptions they would need to hit the spending inflection point overtaking ARR.
Update your lenders often, and if the line is up, they’ll likely keep the funding going.
2. Build trust among sales staff
Along with a new type of SaaS or managed services contract, companies need to rework their sales compensation. For all of this to work, the sales staff must believe that they can make more money with this new model.
“Our subscriptions average $3,000 per month, so for us, basing compensation on the monthly fee with a percentage of the onboarding cost did the trick,” Jackson says. “Once the sales staff had one or two under their belt and could see the extra dollars in compensation, we were off to the races.”
Depending on your average MRA per sale and the frequency of sales, you can adjust accordingly.
3. Become a leaderless organization
During their transition, Jackson realized that legacy companies had ingrained management processes and hierarchies that crippled innovation and new product creativity. They had to divide all the development staff into teams of 2 or 3 people. These small teams needed to be fluid, meaning they could change without line management approval to fit the job. Essentially, everyone deserves the right to become a leader.
“We also had to make major changes to our software,” Jackson said. “We couldn’t wait for endless specs and revisions to get where we needed to go.”
“The Starfish and the Spider” by Ori Brafman and Rod Beckstom is a great reference when considering re-engineering your development and integration process.
4. Understand subscription and SaaS metrics
According to Jackson, there are important metrics that need to be monitored on a daily basis, so businesses should familiarize themselves with these terms:
CHURN, ARR, MRR, CAC, CMGR, NRR, ACV and LTV.
“You need to monitor these metrics every day,” Jackson points out. “When considering SaaS and subscription licensing, understanding these metrics and their relationship is a requirement.”
Jackson recommends “The SaaS Metrics That Matter” by David Sacks and Ethan Ruby as a great primer to help understand these data points.
5. Market your new licensing model heavily
Customers and prospects need to know that your organization is changing, says Jackson. You need to act like and become a startup by redesigning your software for faster integration, and you need to provide an unparalleled service environment. To do this, Jackson offers several strategies.
“Track your success metrics such as churn, customer acquisition costs, and average subscription value,” says Jackson. “Invite your entire organization to the transition and the new journey. It will have to completely disrupt your business and your people.
“They need to understand the plan and that the goal is in their interest as much as yours.”
6. Focus on the new and freeze the old – in other words, innovate
Traditional companies often have a solid collection of very feature-rich legacy software. Some of these applications may have reached end of life. Jackson says now is the time to stop legacy development and focus on innovation and new products.
“We decided to develop complementary products as well as some new products to complete our product line,” says Jackson.
He recommends “First, Better, or Different” by John Brady Jackson when deciding which projects to work on and which to leave behind.
“Understanding this concept of niche product development and marketing was key in deciding which products to work on and which not to work on,” Jackson says. “Your customers need to see additional value when you start offering subscription licenses.”
The key thing for Jackson and the SCS team was not to stay attached to the past. By moving forward fearlessly and relentlessly, they were able to build a new model that changed their entire business.
As Jackson explains, the best companies fear the future. They create it.
“Legacy software development companies need to reshape to survive and transition to a recurring revenue model,” Jackson says. “Do not be afraid to destroy most of the organizational structure and the transition process of the company.”
Software Consulting Services, LLC is a software development company for the publishing industry. Their mission is to help customers realize operational and creative savings through better technology.
To learn more, please visit www.newspapersystems.com.
Phone: (800) 568-8006